Every day, the sun rises on Wall Street, and a plethora of professional analysts wakes to issue new opinions on stocks. Meanwhile, at the Fool, thousands of participants in our free CAPS service rate thousands of stocks, with many demonstrating better investing insight than published analysts. (Visit http://caps.fool.com.)
Enough top-performing CAPS members have turned bullish on Kraft Foods (NYSE: KFT) recently to boost it to the highest-possible five-star rating. A total of 1,673 members have weighed in on Kraft, with many of them offering analysis and commentary explaining the recent optimism.
As the largest North American food maker, Kraft has taken steps to cut costs and spend more on advertising to attract customers. Price hikes have also helped improve revenue, with Kraft’s sales rising 19.4 percent to $10.5 billion in the third quarter. The sale of the Post cereal brand helped earnings per share more than double, and management expects an easing of pressure from commodity price increases.
Investors are looking harder lately at large-cap stocks that pay a healthy dividend. In addition, stocks with strong retail value propositions are nice to have in portfolios during bad economies, thanks to their recession-resistant qualities. With Kraft holding both qualities, more than 93 percent of the CAPS members rating the company expect it to outperform the market.
Ask the Fool
Q: What are good signs for buying stocks? – R.S., Pittsburgh
A: If you’re referring to the economy, it may seem counterintuitive, but a slumping economy can actually offer more stock bargains than an economy firing on all cylinders. In good times, stocks often get bid up beyond their intrinsic worth. In bad times, they can fall below their intrinsic value. There are bargains galore these days.
But not all stocks are alike. For any stock you’re considering, you need to get to know the underlying company well, since you’ll essentially be buying a piece of it – and its future. You should study its annual and quarterly reports, evaluating things like its debt load, profit margins, free cash flow and growth rates. Superinvestor Warren Buffett says he concerns himself with these questions when evaluating stocks: Can I understand the company? Does it have sustainable competitive advantages? Is the management exceptional? Is the price attractive?
Q: I keep reading about “points” in financial articles. What are they? – P.V., Telluride, Colo.
A: There are several different kinds of points in the financial universe. When securing a mortgage, in order to get a lower interest rate, you usually have the option of paying some points up front, each of which is 1 percent of the value of the loan. Indexes such as the Dow Jones industrial average or S&P 500 are often quoted in points, not dollars, even though their components may be stock prices. Finally, a “basis point” is one one-hundredth of a percentage point. So an interest rate that rises from 6 percent to 6 ½ percent has advanced 50 basis points. We hope we’ve made our points.
My smartest investment
In 1976 I had a checking account at Franklin State Bank in New Jersey. The bank had a promotion deducting a voluntary amount from accounts to purchase bank shares. Before moving from New Jersey, I made 26 monthly purchases of $25, for a total of $650. Franklin was bought by United Jersey Bank, which became Summit Bank, which was purchased by Fleet Boston, which became Bank of America. Except for reinvesting dividends, I never added another penny to the $650. By 2004, the investment was worth nearly $50,000. Not a bad return! – Oscar F., Greenacres, Fla.
The Fool Responds: We should say not! Bank of America shares have plunged lately, amid our recent credit crisis and overall market swoon. But your profit is still north of $20,000, and you may still reach new heights by hanging on. Of course, remember that if and when you find more promising investments, it’s often smart to move your money into them, as long as you’re not trading in and out of stocks too frequently. Patience has made many investors wealthy.
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